I live in a eurozone country that a lot of people think will soon default or restructure its debt. My family has a savings account in a bank here. A similar question has been asked before, but it isn't quite the same thing.

First, what are the dangers to our savings if the country defaults or restructures its debts? Is it possible to lose everything? Will the banks close down? Will the money be devalued? Is it possible that the government will take some of it?

Second, what can one do to avert these risks? Is moving the money to a bank in a different country a good idea? What are the rates for that? How about exchanging it to a different currency? Is investing in real estate or something else financially sound or would that run the same or bigger risks?

9 Answers
9

In theory, anything can happen, and the world could end tomorrow. However, with a reasonably sane financial plan you should be able to ride this out.

If the government cannot or won't immediately pay its debt in full, the most immediate consequence is that people are going to be unwilling to lend any more money in future, except at very high rates to reflect the high risk of future default.

Presumably the government has got into this state by running a deficit (spending more than they collect in tax) and that is going to have to come to an abrupt end. That means: higher taxes, public service retrenchments and restrictions of service, perhaps cuts to social benefits, etc.

Countries that get into this state typically also have banks that have lent too much money to risky customers. So you should also expect to see some banks get into trouble, which may mean customers who have money on deposit will have trouble getting it back. In many cases governments will guarantee deposits, but perhaps only up to a particular ceiling like $100k.

It would be very possible to lose everything if you have speculative investments geared by substantial loans. If you have zero or moderate debt, your net wealth may decrease substantially (50%?) but there should be little prospect of it going to zero.

It is possible governments will simply confiscate your property, but I think in a first-world EU country this is fairly unlikely to happen to bank accounts, houses, shares, etc.

Typically, a default has led to a fall in the value of the country's currency. In the eurozone that is more complex because the same currency is used by countries that are doing fairly well, and because there is also turbulence in other major currency regions (JPY, USD and GBP). In some ways this makes the adjustment harder, because debts can't be inflated down.

All of this obviously causes a lot of economic turbulence so you can expect house prices to fall, share prices to gyrate, unemployment to rise. If you can afford it and come stomach the risk, it may turn out to be a good time to buy assets for the long term. If you're reasonably young the largest impact on you won't be losing your current savings, but rather the impact on your future job prospects from this adjustment period.

You never know, but I don't think the Weimar Republic wheelbarrows-of-banknotes situation is likely to recur; people are at least a bit smarter now and there is an inflation-targeting independent central bank.

I think gold can have some room in a portfolio, but now is not the time to make a sudden drastic move into it. Most middle class people cannot afford to have enough gold to support them for the rest of their life, though they may have enough for a rainy day or to act as a balancing component.

So what I would do to cope with this is: be well diversified, be sufficiently conservatively positioned that I would sleep at night, and beyond that just ride it out and try not to worry too much.

Don't have all your cash savings in a single bank.

Consider putting some money into a managed fund or ETF that invests outside of your country. This is easier to set up than a foreign bank account (ymmv) and diversifies against currency and local market risk.

Are you painting the "inflation-targeting independent central bank" as a good guy?
– mbhunterNov 24 '10 at 21:22

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I think hyperinflation is unlikely in the presence of a functioning independent inflation-targeting central bank. It's conceivable that a European country would get into a Zimbabwe-style institutional collapse, but I don't see that on the cards at the moment, and I doubt a sovereign debt collapse/renegotiation would be enough to induce it.
– poolieNov 24 '10 at 22:02

The biggest risk you have when a country defaults on its currency is a major devaluation of the currency. Since the EURO is a fiat currency, like almost all developed nations, its "promise" comes from the expectation that its union and system will endure.

The EURO is a basket of countries and as such could probably handle bailing out countries or possibly letting some default on their sovereign debt without killing the EURO itself. A similar reality happens in the United States with some level of regularity with state and municipal debt being considered riskier than Federal debt (it isn't uncommon for cities to default).

The biggest reason the EURO will probably lose a LOT of value initially is if any nation defaults there isn't a track record as to how the EU member body will respond. Will some countries attempt to break out of the EU? If the member countries fracture then the EURO collapses rendering any and all EURO notes useless. It is that political stability that underlies the value of the EURO.

If you are seriously concerned about the risk of a falling EURO and its long term stability then you'd do best buying a hedge currency or devising a basket of hedge currencies to diversify risk. Many will recommend you buy Gold or other precious metals, but I think the idea is silly at best.

It is not only hard to buy precious metals at a "fair" value it is even harder to sell them at a fair value. Whatever currency you hold needs to be able to be used in transactions with ease. Doesn't do you any good having $20K in gold coins and no one willing to buy them (as the seller at the store will usually want currency and not gold coins).

If you want to go the easy route you can follow the same line of reasoning Central Banks do. Buy USD and hold it. It is probably the world's safest currency to hold over a long period of time.

Current US policy is inflationary so that won't help you gain value, but that depends on how the EU responds to a sovereign debt crisis; if one matures.

FXCM is a company (they actually just IPO'd this week) that will let you easily trade currency futures to hedge your risk. This assumes you can trade on the US market though I believe. fxcm.com
– Michael PryorDec 3 '10 at 22:24

The danger to your savings depends on how much sovereign debt your bank is holding. If the government defaults then the bank - if it is holding a lot of sovereign debt - could be short funds and not able to meet its obligations.

I believe default is the best option for the Euro long term but it will be painful in the short term. Yes, historically governments have shut down banks to prevent people from withdrawing their money in times of crisis. See Argentina circa 2001 or US during Great Depression. The government prevented people from withdrawing their money and people could do nothing while their money rapidly lost value. (See the emergency banking act where Title I, Section 4 authorizes the US president:"To make it illegal for a bank to do business during a national emergency (per section 2) without the approval of the President." FDR declared a banking holiday four days before the act was approved by Congress. This documentary on the crisis in Argentina follows a woman as she tries to withdraw her savings from her bank but the government has prevented her from withdrawing her money.)

If the printing press is chosen to avoid default then this will allow banks and governments to meet their obligations. This, however, comes at the cost of a seriously debased euro (i.e. higher prices). The euro could then soon become a hot potato as everyone tries to get rid of them before the ECB prints more. The US dollar could meet the same fate.

What can you do to avert these risks? Yes, you could exchange into another currency. Unfortunately the printing presses of most of the major central banks today are in overdrive. This may preserve your savings temporarily.

I would purchase some gold or silver coins and keep them in your possession. This isolates you from the banking system and gold and silver have value anywhere you go. The coins are also portable in case things really start to get interesting. Attempt to purchase the coins with cash so there is no record of the purchase. This may not be possible.

+1 fianally after searching for days over the web I found someone who states loud and clear real facts based on HYSTORICAL happenings. Thanks for sharing this, I always thought in case of default the government would stop people from withdrawing from bank accounts, but I couldn't find some references on the web. Dis you read this on the web? If yes, could you share some links?
– Marco DemaioDec 3 '10 at 18:11

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-1 I don't think telling people to buy gold or silver coins is a good idea. If you think things are going to be that bad, you should just stock up on durable goods, not speculate further by buying commodities. Or just hedge your currency position... Of course if you think the entire world markets are going to break, you should be buying a bunker with lots of food :P
– Michael PryorDec 3 '10 at 22:27

@Marco - I updated my answer with links to examples of bank shutdowns in the US and Argentina. I think the Argentina video documentary is well done and something similar will happen in the US.
– MuroDec 4 '10 at 3:29

@Michael - Why is buying gold coins speculation? Isn't holding US dollars a way of speculating that the US dollar will retain its value? BTW - Buying 6 months worth of food is not a bad idea. Its hard to hedge against a currency with $50K or $100K of food. Not ideal. Gold and silver work much better.
– MuroDec 4 '10 at 3:35

@muro you lose too much converting into actual gold. buying gold retail is going to shave so much off your money. it's like if you tried to buy euro's from your bank in the US. if you go usd->eur->usd you'd lose 10% of your money. with gold coins, the conversion would be even worse because the liquid gold market has a lot of shady people in it and it's not easily converted to money.
– Michael PryorDec 6 '10 at 20:10

Second question: The risk is that the currency will become worth less, or even worthless. Most will resort to the printing press (inflation) which will tank the currency's purchasing power. A different currency will have the same problem, but possibly less so than yours. Real estate is a good deal. So are eggs, if you were to ask a Weimar Germany farmer. People will always need food and shelter.

So, do you think that even if it is a small country that fails, the euro as a whole is very likely to lose a lot of its value?
– NaurgulNov 24 '10 at 16:04

Is any loss of the Euro's value a good thing?
– mbhunterNov 24 '10 at 18:06

Currencies don't "lose value" in the straightforward sense a car loses value when you drive it off the lot. They have a price relative to other currencies, assets, commodities, etc, but not an absolute value. If the Euro declined in value relative that would be helpful for at least some member countries and some residents. It wouldn't necessarily imply a great change in the price of eggs.
– poolieDec 3 '10 at 22:12

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@poolie: Of course they have an absolute value. They can be used as wallpaper, note paper, toilet paper, lining for hamster cages, kindling, etc. One hopes that one's currency is worth more than this. Inflation erodes the premium one places on the currency above merely using it to cover a nail hole.
– mbhunterDec 3 '10 at 23:18

Basically, if you're living in a European country that's effectively in default and in need of a bailout, the range of things that can happen is difficult to predict... the fate of countries like Ireland and Greece, whatever the scenario, will be economic and social upheaval.

But, this isn't the end of the world either... it's happened before and will happen again. As an individual, you need to start investing defensively in a manner appropriate for your level of wealth.

Things to think about:

Don't panic. You need to make a decision based on facts, not fear or other emotion.

My 0,02€ - I probably live in the same country as you. Stop worrying. The Euro zone has a 100.000€ guaranty deposit. So if any bank should fail, that's the amount you'll receive back. This applies to all bank accounts and deposits. Not to any investments. You should not have more than 100.000€ in any bank. So, lucky you, if you have more than that money, divide between a number of banks.

As for the Euro, there might be an inflation, but at this moment the USA and China are in a currency battle that 'benefits' the Euro. Meaning you should not invest in dollars or yuan at this time. Look for undervalued currency to invest in as they should rise against the Euro.

Laws concerning guarantee deposits could easily change once the shit hits the fan though. It's not as much a guarantee as an vague promise, I think.
– NaurgulNov 26 '10 at 11:21

Banks have the obligation to pay a percentage to an insurance company. Audits. The works. Only if the whole system brakes down will there be troubles. I don't see that happening, at this moment.
– GUI JunkieNov 26 '10 at 13:40

Don't forget the Iceland scenario: Bank fails (quite possibly because its government bonds go under). The government has to step in to cough up the guarantee, but is unable to. That's basically the current Spanish risk (Q2 2012)
– MSaltersJun 15 '12 at 13:12

Best thing to do is convert your money into something that will retain value. Currency is a symbol of wealth, and can be significantly devalued with inflation. Something such as Gold or Silver might not allow you to see huge benefit, but its perhaps the safest bet (gold in particular, as silver is more volatile), as mentioned above, yes you do pay a little above spot price and receive a little below spot when and if you sell, but current projections for both gold and silver suggest that you won't lose money at least. Safe bet. Suggesting it is a bad idea at this time is just silly, and goes against the majority of advisers out there.

I am going to add in an opinion here from the Wall Street Journal that I read this morning in What's at Stake in the Greek Vote, in light of current events and elections in Greece. The article claims that if the election results make it sound like a break from the Euro is imminent then

... we will see a full-fledged bank run. Greek banks would collapse ... The market exchange-rate would likely be two or three drachmas to the euro, which would double or triple the Greek price of imported goods within a few days. Prices of assets, including real-estate assets, would crumble. Those who moved their deposits abroad would be able to buy these assets cheaply, leading to a significant, regressive redistribution of Greek wealth.

In short, you'd lose two-thirds of your savings unless you were storing them somewhere safe from the conversion. The article also predicts difficulty importing goods (other nations will demand to be paid in euro, not drachma) leading to disruption of trade and various supply shortages.

I will note that the predictions here seem to be in opposition to some other advice here which suggests that real estate will be an effective hedge.

Remove your money. If you do not need this money for some time, you can convert it to Gold, and now is a good time to buy. Gold is not expected to decrease much in price as we're already at the bottom of the employment cycle and the Depression is already begun and will take about two years to grip the world.

Thank you for your interest in this question.
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